Buy to let interest deductions – legal challenge by landlords fails

Court 18 of the Royal Courts of Justice was unusually packed with members of the public: mostly landlords apart from a couple of property tax specialists, such as myself, whose clients would be impacted by the ruling.

Background

We were gathered to hear Cherie Booth QC (Human rights) and Conor Quigley QC (EU and competition law) conduct an appeal against an earlier decision in July this year which denied a judicial review of the change to the rules on interest deductibility set out in Clause 24 of the 2015 Finance Bill. This restricts, over a period of 4 years starting in 2017, the ability of individual landlords to offset interest payments against rental income to the basic rate of income tax (20%). The case had been brought on behalf of Mr Bolton, a landlord and, I understand, crowd funded by 800 or so buy to let (“BTL”) investors to the tune of circa £100,000.

Summary of the case against HMRC

The case against HMRC was based on following propositions:

• Restricting interest payments to individuals but not companies constituted illegal state aid under Article 107 of the EU treaty;
• The ability to obtain a tax deduction was some form of property right capable of ownership, which had been unjustly interfered with contrary to the provisions under Article 1 Protocol 1 of the European convention on Human Rights[1];
• Favouring a company over an individual and / or not extending the legislation to furnished holiday let owners was discriminatory under Articles 1 and 14 of European Human Rights convention.
• That there was a public interest point in allowing BTL investors to “have their day in Court”.

Key findings from the proceedings

In order to succeed on the first point, it was first necessary to demonstrate that individuals and companies are in a comparable legal and factual position. Mr Quigley QC argued that the undertakings provided by corporate and individual landlords were the same i.e. they were providing properties for rent. This was, however, only the case when looked at that particular level: if considered at the level of ownership of land then owner occupiers who don’t receive any deductions for mortgage interest payments should also be brought into the equation; the counter by Counsel was that owner occupiers are not providing property for rent. Whilst acknowledging that HMRC had a right to tax corporates and individuals at differential rates without this being discriminatory, Counsel argued that (i) in considering how income is measured (i.e. the “tax base” if I were to use another phrase),  individuals were potentially being taxed on income they didn’t have and (ii) tax rates should be applied to all individuals across the spectrum whereas individual property landlords, alone, were being singled out in relation to this interest restriction which indirectly favoured property companies. This, therefore, constituted illegal state aid in favour of corporate property landlords.

Critically, however, both plaintiff’s counsel were unable to come up with any authority for individuals being legally comparable to companies; as the Judge noted in his summing up one is dealt with for tax purposes under the Income Taxes Act and the other under the Corporation Taxes Act: they are not legally comparable and without such comparability, the state aid rules could not be brought into play.

In relation to the second point Timothy Brennan QC, acting for HMRC, reminded us that income tax is an annual tax which, if not renewed, would disappear (albeit not something we any longer anticipate, given that Prime Minister Pitt the Younger introduced it back in 1799 at a top rate of 10%) and that no property right could be attached to a particular income tax measure or relief which only persisted for one year. The presiding Judge agreed.

On the third point the Judge ruled that the lack of legal comparability between individuals and corporates also meant that there was no ground for finding discrimination one against the other. In relation to whether the measures were proportional Parliament had wide discretion particularly in relation to tax matters which had been established over centuries. Whilst Cherie Booth QC’s summing up for the “little person” against an overbearing State for them to “have their day in Court” drew applause from the Public Gallery (and firm but courteous admonishment from the Judge to respect the need for silence), the presiding Judge’s rebuttal of this point in his ruling was forceful: there is no public interest in a full hearing merely to allow a case which is bound to fail, fail. (Ouch!!)

Further reflections

I noted back in February when the possibility of this case was being mooted, that there was a straightforward counter for HMRC in relation to the measures being discriminatory. Timothy Brennan QC cited those points (and more) in his arguments for HMRC. I struggled then to see the merits of a claim based on discrimination under the Human Rights legislation: our tax system is full of incentives to particular sectors that are not available to other sectors; the capital allowance regime being an obvious case in point. The risk to the tax system of any and all such tax incentives or disincentives being a breach of human rights and / or some form of state aid is that it could open up a Pandora’s box of claims and counter claims and render the ability of government to make tax law to further their economic and social aims, almost impossible. The Judge, in his ruling, came down very firmly in agreement with this assessment.

In both my earlier articles I did question the sense in bringing this case at all and in incurring significant legal costs. It is perhaps disappointing that Mr Bolton and his financial backers were not better advised on the likelihood of success in bringing this action and, alternatively, seeking to appropriately restructure their holdings to mitigate the impact of the new tax rules; rules which the sovereign UK Parliament rightly has authority to make.

Bas Kundu
Head of Real Estate Tax, Simmons Gainsford
bas.kundu@sgllp.co.uk
6^th October 2016

[1] Protocol 1 Art.1 of the European Convention on Human Rights provides:

• Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
• The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.